Why You Should Have An Estate Plan

We are often asked “Why do I need an estate plan?” If you have assets, are married, or have children, any of these is a reason to have an estate plan. An estate plan enables you to distribute your assets to the people you choose, in the manner you want them to be received, and to avoid costly probate and estate taxes. These goals are usually accomplished by a will and one or more trusts. Other components of an estate plan typically include a Health Care Proxy (sometimes called a Health Care Power of Attorney) and a Durable Power of Attorney. These documents allow you to designate a trusted person to make healthcare or financial decisions for you if you become unable to do so yourself.

If you think the total value of your assets is too low to be subject to estate taxes, on the federal level, you may be right. But, on the state level, chances are good your estate is taxable.

The federal estate tax exemption amount has increased significantly; it was $600,000 in 1997 and is now $11,580,000. But the Massachusetts estate tax exemption has unfortunately remained at only $1 million since 2006.* Only 12 states have a separate state estate tax system, and Massachusetts is tied with Oregon for having the lowest exemption amount. (Five other states have a state “inheritance tax,” which taxes recipients who receive a decedent’s assets, rather than taxing the decedent’s estate itself as in an “estate tax.”) Because of the low Massachusetts exemption amount, many Massachusetts residents--including non-Massachusetts residents who own Massachusetts real estate--need to engage in appropriate estate planning with a qualified Massachusetts-licensed estate planning attorney to reduce the potential Massachusetts estate taxes on their estate assets.

In general, while taxable estates under $11,580,000 owe no federal estate tax, Massachusetts taxable estates valued over $1 million owe a Massachusetts estate tax. The Massachusetts estate tax is a graduated rate system, meaning that increasing levels of wealth are taxed at increasing tax rates. For example, the Massachusetts estate tax on a $1,000,001 estate is $33,200 (an effective 3.3% tax rate), but the estate tax on an $11,000,000 estate is $1,226,800 (an effective 11.2% tax rate). Note that the Massachusetts “taxable estate” does not include real estate or tangible personal property located outside Massachusetts, or Massachusetts real estate owned by a non-Massachusetts resident through a Limited Liability Company (“LLC”).

Two important estate tax reduction strategies to be aware of are:

1. By establishing “Credit Shelter Trust” estate plans, a married couple can double the Massachusetts estate tax exemption to $2 million ($1 million for each spouse), thus saving approximately $100,000 in Massachusetts estate taxes, as compared to married couples who own their assets jointly. In general, a Credit Shelter Trust is a trust for the benefit of the surviving spouse--holding up to $1 million in assets--that is funded after the death of the first spouse. The surviving spouse or someone else may be the sole Trustee, or the surviving spouse and someone else may serve as co-Trustees. A Credit Shelter Trust avoids estate taxes at both spouses’ deaths.
2. Single (non-married) individuals who have assets worth more than $1 million and married couples who have assets worth more than $2 million should consider making gifts during their lifetime to their children, grandchildren, and/or others. Gifts of up to $15,000 per year per recipient are “annual exclusion gifts” that reduce one’s federal and Massachusetts taxable estates. Additionally, payments of any amounts made directly to schools/colleges for (anyone’s) tuition or made directly to (anyone’s) medical or other health care providers are also exempt from federal and Massachusetts estate taxation. Note that lifetime gifts of amounts greater than $15,000 per year per recipient avoid Massachusetts estate taxation entirely, but if the sum of these larger lifetime gifts and the value of one’s Massachusetts taxable estate exceeds $1 million, then a Massachusetts estate tax will be owed based on the value of the Massachusetts taxable estate, even if it is under $1 million.

Each family has its own unique considerations. Fortunately, your estate plan can be customized with the best possible solutions for your situation. The estate planning lawyers at Fletcher Tilton PC would be happy to speak with you if you have any questions or would like our help implementing your estate planning goals and wishes in the most tax-efficient manner.



©2020. This material is intended to offer general information to clients and potential clients of the firm, which information is current to the best of our knowledge on the date indicated below. The information is general and should not be treated as specific legal advice applicable to a particular situation. Fletcher Tilton PC assumes no responsibility for any individual’s reliance on the information disseminated unless, of course, that reliance is as a result of the firm’s specific recommendation made to a client as part of our representation of the client. Please note that changes in the law occur and that information contained herein may need to be reverified from time to time to ensure it is still current. This information was last updated August 2020.